Overview (For the Week Ending Wednesday, August 19, 2009)
- Natural gas spot prices declined this report week (August 12-19), with the largest decreases generally occurring in the western half of the country. The Henry Hub spot price decreased by $0.34 to $3.02 per million Btu (MMBtu).
- At the New York Mercantile Exchange (NYMEX), futures prices decreased as supplies continued to be viewed as more than adequate to address near-term demand, including heating-related demand increases this winter. The futures contract for September delivery decreased by $0.36 on the week to $3.12 per MMBtu.
- Working gas in underground storage as of last Friday is estimated to have been 3,204 billion cubic feet (Bcf), which is 19.1 percent above the 5-year (2004-2008) average. During the week ending Friday, August 14, implied net injections of natural gas into underground storage totaled 52 Bcf.
- The price of crude oil increased by more than 3 percent during the report week. After an initial decline, the West Texas Intermediate (WTI) crude oil price climbed to $72.54 per barrel (or $12.51 per MMBtu) yesterday, its highest level since mid-June.
- NYMEX Natural Gas Futures Near-Month Contract Settlement Price, West Texas Intermediate Crude Oil Spot Price, and Henry Hub Natural Gas Spot Price Graph
Significant price declines at all markets in the lower 48 States occurred during the report week, as supplies continued to appear more than adequate in the near-term and the likelihood of a hurricane-related disruption in production appeared limited. Many spot prices are trading at near 7-year lows, with no daily market prices exceeding $4 per MMBtu and many below $3 per MMBtu. Particularly in the Northeast, there was substantial demand in the electric power sector to meet air conditioning needs. However, current supplies easily met this increase in consumption. In fact, inventories of natural gas are well above average levels and may reach a record level at the current rate of injection. In addition, the absence of a significant hurricane-related threat to the Gulf of Mexico likely temporarily contributed to lower prices. However, peak storm season has only just begun, and a potential disruption to supplies cannot be discounted in the coming weeks. The Henry Hub spot price during the report week decreased by $0.34, or 10 percent, to $3.02 per MMBtu. This price is the lowest recorded at the Henry Hub since August 15, 2002. On a regional basis, spot markets along the Gulf Coast in Louisiana and East Texas registered average price decreases on the week of $0.31 and $0.29 per MMBtu, respectively. Average regional prices yesterday were $3.01 per MMBtu in Louisiana and $2.99 per MMBtu in East Texas.
Factors on both sides of the market place have contributed to the price declines over the past several months. Recent reductions in natural gas price levels may be related to continued strength in domestic production capacity, specifically in unconventional gas fields such as the Barnett Shale in Northeast Texas and the Haynesville Shale in Louisiana. Reduced demand as a result of the decline in economic activity is evident in the industrial sector, which accounts for more than 30 percent of yearly natural gas deliveries. The combined impact of these influences on the recent natural gas supply and demand balances has resulted in an inordinately high amount of natural gas in storage for this time of year (See storage section below).
Prices at the majority of markets west of the Mississippi River decreased sharply, and regional prices for the Rockies and Midcontinent continue to be the lowest in the country at well under $3 per MMBtu. Price decreases averaged $0.29 per MMBtu in the Rockies, where higher-than-normal storage inventories have increased concerns. At Rockies trading locations, the average price as of August 19 was $2.68 per MMBtu, or 9.8 percent lower than the previous Wednesday. Midcontinent regional pricing is now well-integrated with Rockies price trends because of increased pipeline capacity between the regions. The price for supplies off Panhandle Eastern Pipeline Company in the Midcontinent finished the week at $2.81 per MMBtu, a decrease of 28 cents from the previous Wednesday.
Temperatures in the Northeast were well above 90 degrees during the report week as a heat wave moved through the region, likely limiting price declines in the region. The average price in the Northeast yesterday was $3.36 per MMBtu, which was $0.20 lower than the previous Wednesday. The Northeast generally experiences the highest prices in the country (outside Florida during the summer), partly because of pipeline transportation costs for deliveries from the Gulf of Mexico region. The average spot price for delivery in New York off Transcontinental Gas Pipe Line (Transco Zone 6-NY) decreased by $0.14 to $3.46 per MMBtu this week, reflecting a premium of $0.44 per MMBtu to the price at the Henry Hub.
Despite a significant increase in the forward crude oil price, natural gas futures this week continued a trend of lower prices. At the NYMEX, the price of the contract for September delivery decreased by $0.36 during the report week to $3.12 per MMBtu, which is the lowest price for the near-term contract in 7 years. Compared with the September contracts from the previous 2 years, the difference in price is stark: the September 2008 and September 2007 contracts expired at $8.39 per MMBtu and $5.43 per MMBtu, respectively.
At the end of trading yesterday, the 12-month strip, which is the average for futures contracts over the next 12 months, was priced at $5.14 per MMBtu, representing a decrease of about 27 cents since last Wednesday. Beginning with the September 2009 contract, futures prices increase sharply through the beginning of 2010. The highest-priced contract in the futures strip until the end of next winter is the February 2010 contract, which closed at $5.44 per MMBtu on August 19.
Working natural gas in storage totaled 3,204 Bcf as of Friday, August 14, 2009, according to EIA's Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection during the report week was 52 Bcf, bringing the current level of supplies in underground storage to 513 Bcf or 19 percent more than the 5-year (2004-2008) average for this time of year. Current stocks exceed last year's level by 562 Bcf. The net injection during the comparable week over the past 5 years averaged 56 Bcf, while the net injection for the comparable week last year totaled 82 Bcf.
Last week's implied net injection of 52 Bcf is the smallest net injection since the week ending April 17, 2009. The smaller injection relative to prior reports this year resulted from higher demand for natural gas in electric power sector. During the report week, the U.S. average temperature as reported by the National Weather Service was 75.4 degrees, compared with 74.6 degrees the prior week. The number of cooling degree-days (CDDs) was 7 percent higher than normal in the United States as a whole (see Temperature Maps and Data). In particular, CDDs in the West South Central region were 9.8 percent higher than normal for the week. The West South Central region includes Texas, which has a substantial amount of natural-gas fired electric power plants.
A significant differential between current spot prices and prices for NYMEX futures contracts for next winter delivery provides a strong economic incentive for the high level of storage activity this year. On Friday, August 14, the date of the inventory measurement in this week's report, the Henry Hub average price was $3.18 per MMBtu, while the average price for delivery next winter (November through March) was $5.32 per MMBtu. Traders on the futures market are able to lock in this difference of over $2 per MMBtu and cover their risk exposure by storing supplies until next winter.
Other Market Trends
Report Examines Effects of CBM Drilling in Powder River Basin. The Bureau of Land Management's (BLM) Wyoming Office and the Wyoming State Geological Survey released a report August 7 examining the effects of coalbed methane (CBM) natural gas production in Wyoming. The report examined 111 monitoring wells from 1993 to 2006 in the Wyoming Powder River Basin, as part of the BLM's deep monitoring well network. As a result of public concerns regarding groundwater resources in Wyoming and Montana, the network was designed to evaluate potential leakage between CBM water-producing coal deposits and adjacent sandstone beds, as well as measure the drawdown in producing zones. The study found that between 1993 and 2006, CBM producers had withdrawn a cumulative 4.1 billion barrels, or 174 billion gallons, of groundwater. The report indicates that a significant increase in CBM activity occurred between 2002 and 2006 in the Powder River Basin. At the end of 2001, there were only 14,220 CBM wells permitted, compared with 24,002 CBM wells at the end of 2006. Of these wells, 17,202 were producing and 6,800 were shut in. A cumulative total of 2.25 trillion cubic feet (Tcf) of natural gas was produced from CBM through 2006. The report represents an initial analysis of data, and will be updated with 2007 and 2008 data when available.
Natural Gas Transportation Update
- Natural Gas Pipeline Company of America announced that required maintenance at Station 801 in Carter County, Oklahoma, will begin August 19, 2009. As a result, a reduction in firm transportation capacity and suspension of firm secondary and interruptible service will occur. The announcement did not indicate the duration of the maintenance.
- Gulf South Pipeline announced on August 18 that pigging maintenance on its Jack Watson Lateral in Mississippi will begin Thursday, August 20. The maintenance is expected to last 1 to 2 days, during which no deliveries will be made to the Jack Watson Power Plant (also located in Mississippi). Pigging is the practice of using pipeline inspection gauges or 'pigs' to perform various operations on a pipeline without stopping the flow of natural gas in the pipeline. The term 'pigs' refers to the squealing sound the gauges make while traveling through a pipeline.
- Tennessee Gas Pipeline Company posted a notice on August 18 that it plans to initiate a series of operational tests of its compression capabilities located on the offshore Louisiana Blue Water System at the end of the week. The tests are aimed at both Vermillion Block 245 and the Cocodrie Separation and Dehydration Facility, and are expected to last roughly 2 weeks. The pipeline warned that operators and producers connected to any segment of the Blue Water System may experience higher- or lower-than-normal pipeline pressures. Tennessee requested that affected operators and producers set their equipment to accommodate fluctuations in pressure, which could be as low as approximately 630 pounds per square inch (psi) or as high as 1,250 psi (maximum allowable pressure) during this test period. During these tests, Tennessee anticipates pressures on the various segments of the Blue Water System to be between 630 pounds per square inch gauge (psig) and 1,050 psig.
- Trailblazer Pipeline Company declared a force majeure at its compressor station 602 located in Lincoln County, Nebraska, on Sunday evening (August 16) after it experienced an unexpected outage as a result of a mechanical failure on one of the compressor units. Effective Monday, August 18, and until further notice, capacity at the station will be reduced to 775 decatherms per day. The pipeline expects to be able to confirm a minimum of 92 percent of total contracted maximum daily quantity for primary firm transportation customers, based on the amount of available capacity as of the time of the announcement. However, some secondary transportation services will not be available during the force majeure.